MUMBAI (Reuters) - The rupee retreated from an over three-and-a-half month high to end marginally lower on Wednesday as continued weakness in local stocks and oil refiner demand to meet crude payments outweighed dollar inflows ahead of the government's stake sale in a state-run utility.

Onshore dollar premiums rose to their highest in 14 years as foreign funds hedged their spot inflows in the forwards markets as the country gears up to raise around $2.25 billion in a share sale in NTPC Ltd (NTPC.NS) on Thursday.

More government stake sales are expected in February and March, although the key event remains the federal budget to be unveiled late this month. That will be a key test of the government's resolve to stick to its fiscal deficit target and avoid populist spending ahead of general elections in 2014.

"The FII inflow has been strong for the past few days and despite that the demand is pretty good around 53.00. Thus, once these inflows from FIIs mainly related to OFSs (offer for sale) start diminishing, INR may come under pressure," said Paresh Nayar, head of fixed income and forex trading at First Rand Bank in Mumbai.

The partially convertible rupee closed at 53.155/165 per dollar, versus its previous close of 53.135/145. It rose to 52.87 earlier in the session, its highest since October 17.

The one year onshore dollar premium surged to its highest in 14 years to 355 points versus its previous close of 348 points, a level last seen in late 1998.

That surge came ahead of NTPC's stake sale. The government also plans to sell shares in state trading company MMTC Ltd (MMTC.NS) and steelmaker Steel Authority of India Ltd (SAIL.NS) before the end of the fiscal year.

Still, the spot rupee remained under pressure as domestic shares ended flat, continuing its weak performance ever since the Reserve Bank of India last week disappointed investors with a cautious stance on future monetary policy.

The weakness in the euro against the dollar also weighed ahead of a European Central Bank meeting, while the rupee was also pressured by outflows related to gas utility.

In the offshore non-deliverable forwards, the one-month contract was at 53.43, while the three-month was at 53.99.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at about 53.37 with a total traded volume of $4.4 billion. (Editing by Anand Basu)

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